RBI does its bit, cuts repo & CRR
This tightness could potentially hurt credit flow to productive sectors of the economy. The structural deficit in the system provided a strong case for injecting permanent primary liquidity into the system. While the equity markets sold off, the bond markets rallied with the yield on the 10-year benchmark inching lower, assuaged by the rate cut as also the comfort of additional liquidity. Governor Subbarao said the RBI would continue to infuse liquidity as and when needed. The government’s cash balances with the RBI, he noted, were unusually high and had been that way for some time. “We are discussing the spending pattern with the government to gauge what liquidity conditions will be like,” Subbarao said.
Economists believe the central bank will cut rates by around 50-75 basis points more in 2013. “Given the elevated levels of the CAD and the CPI, we maintain our view of a further modest easing of 50 basis points in 2013,” wrote Citigroup economist Rohini Malkani.
“A sticky inflation path may be ahead, with inflation hovering in the 6-7% range this year. Policy room, as a consequence, will be limited and the stance of monetary policy has to be cautious,” Deutsche Bank economists wrote.